article was published in The Jakarta Post paper edition, 15 March 2022, written
by Bahtiar Manurung and Yogi Bratajaya
In less than two decades, the focus on
environmental, social and governance (ESG) issues in capital markets has moved
from a niche concern to the mainstream. This shift is reflected in the amount
of capital being invested in ESG-oriented investment funds, which totaled
US$649 billion in 2021.
The private sector’s consideration of ESG issues
will continue to grow as customers, investors, governments and civil society
groups demand more transparency and improved performance in how businesses
address the environmental and social impacts of their operations.
The growing market for ESG investments has
amplified the corporate commitment to the environmental pillar of ESG,
particularly regarding climate change. As of today, 683 of the world’s 2,000
largest publicly traded companies have committed to a net-zero strategy,
according to the Net Zero Tracker. Additionally, the financial sector is
increasingly investing in renewable energy and reforestation projects through
the establishment of sustainable funds.
Companies are also making efforts to improve
their performance relating to the governance pillar of ESG, by establishing
internal corporate governance codes and enacting policies. However, the social
(S) pillar of ESG, which covers a wide range of issues that include human
rights, workplace health and safety, diversity and inclusion, employee
engagement, business ethics and community engagement, has not received adequate
attention in comparison to the other two pillars of ESG.
The lack of focus on the social pillar is due to
many factors. One is the belief that improvement of the “S” pillar of
performance is at odds with financial returns, as it will impose an unnecessary
burden. However, this view is unfounded since improving the “S” pillar of
performance promotes responsible business practices and acts as a risk
mitigation mechanism, which in turn strengthens stakeholder trust.
Another factor is the notion within the investor
community that assessing social performance is difficult since its indicators
are not as straightforward as the other ESG pillars. This notion is not
entirely true. For example, the baseline standards for business and human
rights are clearly defined in the United Nations Guiding Principles on Business
and Human Rights (UNGPs).
The World Economic Forum (WEF) has also issued
stakeholder capitalism metrics that include social aspects, such as diversity
and inclusion, pay equality, wage level, workplace health and safety and
continued development of employees. The lack of focus and effort to improve the
“S” pillar is reflected in the World Benchmarking Alliance’s (WBA) 2022 Social
Transformation Baseline Assessment. The assessment found that out of 1,000 of
the most influential companies across 68 countries, including Indonesia, only 1
percent met the majority of the core social indicators, which covered human rights,
decent work and ethical conduct. In addition, only 7 percent of the 1,000
companies met all the requirements of the WBA’s human rights due diligence
According to the UNGPs, companies are expected to
carry out HRDD to identify, prevent, mitigate and account for how they address
their impacts on human rights.
Similarly, a study of 2020 sustainability reports
of all Indonesian public companies by the Foundation for International Human
Rights Reporting Standards (FIHRRST) found that only 2 percent of 121
sustainability reports assessed had disclosed information about the company’s
human rights policies.
There are many reasons why companies and
investors need to focus on and improve their “S” pillar of performance. First,
the social pillar is closely intertwined with the environmental pillar, as
demonstrated by the race to net zero. Renewable energy projects, such as wind
farms and solar farms, require vast amounts of resources and land to operate,
which could in turn harm surrounding communities, especially indigenous
Second, the negative socio-economic impacts of
the COVID-19 pandemic emphasize the importance of the social pillar. For
example, the pandemic has left millions of workers without any savings to fall
back on, increasing the pool of workers vulnerable to debt bondage and other
forms of forced labor. The pandemic has also exacerbated gender equality as
women have been disproportionately affected. According to the WEF’s 2021 Global
Gender Gap Report, the pandemic has set gender equality back a
Embracing the “S” pillar means that businesses
and investors must identify and prevent the adverse human rights impact of
their activities. HRDD is the main tool that businesses can use to translate
their human rights commitments into concrete actions.
The key to ensuring that HRDD can effectively
identify and mitigate the most salient human rights risks of a business’
operations is through meaningful stakeholder engagement. Stakeholder engagement
enables a company to identify what human rights impacts may arise from their
operations and how significant those impacts may be.
To support companies and investor efforts,
governments should also enact policies that focus on the social pillar of ESG.
The past few years have seen a wave of mandatory HRDD laws in European
countries, including France, the Netherlands and Germany. In addition, the
European Union Commission has recently published a legislative proposal for a
directive on corporate sustainability due diligence.
This directive represents an increased emphasis
on the social pillar of ESG, where it mandates that companies included in the
legislation’s scope identify and manage risks related to human and labor
rights, equality and inclusion, women’s empowerment, anti-corruption and
business ethics within their own operations – and throughout their value chain.
In view of this, Indonesia, as well as other
countries, should follow suit and enact their own mandatory HRDD legislation to
ensure that businesses in their countries can continue to be part of the global
Stock exchanges also play a vital role in
encouraging companies to improve their social pillar performance. In Indonesia,
the Indonesian Financial Services Authority (OJK) should consider enhancing the
sustainability report requirements for public companies by including more
social aspects, such as human rights, diversity and gender equality.
Lastly, multilateral platforms such as the Group
of 20, which will hold its summit in Bali later this year, should also focus on
social issues. Indonesia’s G20 presidency this year presents an invaluable
opportunity to accelerate measures to encourage companies to improve their
social performance. This can be done through the Working Groups (WGs) on
several issues related to the social pillar, including anticorruption,
employment, health and women’s empowerment.
As well as the WGs, Engagement Groups (EGs),
including the Business 20, have also been established. We urge the WGs and EGs,
particularly Business 20, to discuss and formulate plans to further advance
corporate and investor focus on the “S” pillar of ESG to improve social
outcomes around the world.
Manurung is the operations director and Yogi Bratajaya is a business and human
rights specialist at FIHRRST.